While I'm sure you could, you will likely wear out the drive in a very short time doing this, unless you were able to get a ramdrive up and running and use that for the swap file.
ya see, flash has a nasty habit of wearing out, typically after about 100k writes. windows writes A LOT. Just sitting there, windows always seems to be doing something to the drive.
Flash based hard drives (SSD's) that are coming out now utilize a wear leveling methodology to spread out the writes across the entire drive, thus making it last as long as a regular hard drive would, but these little USB drives are not quite that smart, and you can blow through one in less than a month if you do too many writes to it.
I did a DOS based machine running on a 1gig compact flash->IDE adapter and it was really cool. A simple O/S like that is about the only thing I'd suggest (for now) attempting to do on a solid state device.
As for how to do it, I think I would first get everything installed and confgured on a regular hard drive, then use a norton ghost or similar application and see if you can mirror the installed drive onto the USB device. From there it really depends on your motherboard's BIOS to be able to treat that USB device as a real hard drive and be able
to boot to it.
CF->IDE adapter cards work really well for this-no BIOS changes at all, and your machine sees the CF as a normal hard drive.
-jeff!